Without a sales history it becomes very difficult to establish what the possible future sales of a new business will be. This is possibly why so many different financial institutions request copies of sales contracts or letters of undertaking from potential new customers of a new start-up business when evaluating if such a start-up venture could be successful. This request is also quite common from the venture capital funders in South Africa.

There are even BEE funds available in South Africa today, which can only be accessed by a new start-up BEE business if such new business has firm written contracts in hand.

Many SME businesses have however been started in the past by entrepreneurs who possessed a certain technical skill, which was then sold to a customer base. Therefore not all of these businesses, which became successful, started off with firm contracts in hand.

A BEE party wanting to start a new business (grass- roots operation), and needing to raise capital for it, could therefore only do so by having prepared a convincing plan as to how it is going to be successful. This plan must be originated by the aspiring BEE entrepreneur and not by his consultants as the entrepreneur is usually tested by the (under to establish if the entrepreneur has the ability to transform his plan into reality.

I have come across many SME owners, who have identified BEE as of strategic importance to their businesses, but are simply not prepared to share their existing successful business with a BEE party.

Some of these operators have then felt it good to form separate legal entities, which is always without any financial substance, to accommodate BEE parties therein in order to comply with their customer’s BEE procurement policies.

Such ventures are by their very nature start-ups. It is designed by the SME owner only to benefit himself and not the BEE party. This is usually done by ensuring that the new venture has no assets and constitutes a selling organisation only. Every product sold or service rendered by this new venture is acquired through the SME owners‘ existing business at a price which ensures that the profit made from each transaction is retained in the existing SME and only the costs are covered in the new venture.

It is no wonder that I quite often hear from BEE parties themselves that they have had bad experiences with BEE transactions. It is because they have been exploited by some SME owners for personal gain. One often tends to think that it is only the SME owner who has had bad experiences from BEE transactions. After all every SME owner knows someone who knows someone who has had such a bad experience.

Evidence from the USA and UK suggests that democratic employee- owned firms, with all employees owning from (typically) 20% to 1000% of the company, outperform comparable conventional firms by considerable margins.’ Moreover, their shares that are still traded sell for large premiums.’ On average, they grow capital, market share and employment by from 3% to 11⁰/o faster per annum. Because they pay dividends inside the ‘family’ of the firm, their benefit plans are two to three times better and more diverse – and little money travels abroad! Democratic employee-owned firms are some 40% more stable and lead to employee information, education, and participation, which alters management in progressive ways.

Principles of the employee ownership trust (EOT):

• Achieving BEE in terms of ownership and achieving a proper racial and gender balance can be done within the firm.

If employee ownership secures a better-performing company, then the old owners do not have to/will not want to leave. They will face a decline year by year in their percentage ownership, but the value of their holding will likely rise ahead of that relative decline. Employee ownership should grow mainly by using the expansion of the firm to issue new shares that are taken up by the EOT.

• The limitations of an EOT in relation to the BEE scorecard will be the speed at which an EOT can acquire shares, and the BEE composition of employee/owners and management.
• Our national cultural heritage supports a collective view of ownership.

How an employee ownership trust works

In employee-owned firms, all employees vote their common ownership through an EOT, in which employee owners enjoy equal voting rights. This move separates the firm as a ‘command’ organisation from the `democratic/cooperative’ mode of the trust. Benefit flows match each employee’s contribution – best measured by salary. This two-part structure – company and EOT – preserves the right of the board and of management to set policy and to manage day by day, while it provides the vehicle for employee participation and commitment. In fact, it adds agility to the whole decision-making system, as all ‘members’ of the company are more knowledgeable and become party to all crucial decisions.

The structure of the firm and the EOT

Essentially the structure of the EOT is a circle in which employees are able to raise issues through the EOT and from there to the board via the trustees. Equally, the board or management can use the EOT to provide information and open debate on important issues, particularly those that require employee support – such as new directions.

The BEE Act empowers the Minister of Trade and Industry to gazette sectorial charters that are developed by the private sector on an industry-by-industry basis. It allows each industry to explore how it can contribute to transformation, given the constraints and context of that particular industry. Although the Act allows some space for the private sector to drive the process, it also empowers the minister to issue codes of good practice that will form the basis of criteria for the granting of licenses and other authorisations. These codes are meant to react to the changing needs of the transformation process, and also to vary the pressure on the private sector depending on the progress and needs at any given moment. In basic terms, the Act provides the private sector with enough space and the measuring framework to effect transformation, but has the legal means to increase pressure if it does not deliver.

The First Code of Good Practice

The First Code of Good Practice is supported by a strategy document. This code serves two purposes:

To guide the thinking in the process of developing a sectorial transformation charter.

To guide all organs of state in awarding licenses, tenders and other authorisations.

The First Code would apply directly to you if your industry was not currently more precisely defined by a charter (if you are under an industry charter, the charter would have taken the code definitions into account during its evolution). These dimensions are: shareholding, control, skills development, employment equity, preferential procurement, enterprise development and a residual that is normally interpreted as corporate social investment.

Note that the base of the pyramid has the broadest impact on the business environment, laying the foundation for effective interventions in your supply chain (called indirect empowerment). That leads to initiatives that impact your employees. Lastly, your ownership initiatives seem to have limited impact, but, as we will see under employee share options, this is not necessarily the case.

The seven transformation dimensions have the following definitions:

Equity ownership (shareholding): Direct empowerment focuses on the percentage share of economic benefits.

Control: The right or ability to direct or otherwise control the majority of the votes attached to the shareholder’s issued shares; and the right or ability to appoint or remove directors holding a majority of voting rights at board meetings. It is measured as a percentage of black persons in executive management.

Skills development: The development of employees in a company. It is measured as the rand spent on skills development as a percentage of payroll.

Employment equity: To bring about an equitable representation of black persons in all occupations and at all levels of the organisation over a period of time. It is measured through a weighted employment equity analysis.

Preferential procurement: Procurement from black-owned and empowered enterprises as a proportion of total procurement.

Enterprise development: The development of the capacity of black companies (normally suppliers). It is measured by the total investment going to enterprises that are BEE compliant.

Residual (corporate social investment): Allows for flexibility by taking into account the specifics of your industry, but is normally interpreted as corporate social investment. It is generally measured as a percentage of after-tax profit spent annually on housing, transport, bursaries, health, etc.

The charters

The government has developed the First Code for companies to measure and report their efforts towards sustainable broad-based transformation. This framework will be more specifically translated into targets and measures for each industry (called charters), but until this process is completed, companies can use the First Code to measure and report their transformation process and set their own targets using the key dimensions in the code.

If your business falls under a charter, this replaces the code as guide to setting targets and reporting your transformation efforts. However, don’t sit back and wait for a charter to tell you what to do. You should be getting involved in the process of developing your transformation strategy and a charter for your industry in the interim.

Developing an `as-is’ transformation picture

In order to guide your strategic thinking, it is useful to get a very rough picture of your company’s current BEE status set against the key areas of transformation. Using the table below, estimate your company’s raw scoring in each of the areas.

True sustainable transformation requires the business to re-examine what it can do, to ensure that its competitors can’t provide what its customers want. Thus transformation affects how the company does business, who it does business with and what types of business it should do. These are all components of competitive strategy, and the answers to these questions require a clear and simple view of the strategy of your business.

A new “Law” in town

Strategy is a very abused word, but, notwithstanding, we often have marketing strategies and operation strategies, among others. that are designed to translate our overarching competitive strategy into specific operational terms. Why is transformation any different?

Firstly, functional strategies are aligned to competitive strategy, and are essentially the re-translation of competitive strategy into functional terms. This clearly does not apply to transformation as a business requirement. Transformation does not belong to human resources or any other functional area of business, as it impacts across all areas of business.

The other obvious concern about a transformation strategy forming a sub-set of your competitive strategy is that you are then not forced to look at how you can conduct your business so that both transformation and growth of the business are enhanced. You would have already looked at the growth of your business in your competitive strategy, and so that creative tension between competitiveness and growth is not there.

Transformation requires a fundamental shift in the way:

• your business is structured;
• your business strives for customer attention; and
• individuals in your company collectively think and behave.

Sustainable transformation affects the very core of every aspect of your business, and the decisions made now can easily affect the survival of your company, which is the function of strategy. So we need to take a different view of the current strategy of your business.

Darling, please replace your current way to do business, otherwise you have to be dead

The core purpose of your business might undergo some changes as you effect transformation. Your clients, and what they value from you, might require different products to what you currently offer.

The roles of your supply chain, and even possibly the role-players, might change as you explore transformation. Preferential procurement makes you not only reconsider whom you buy from, but also what you might buy.

The internal stakeholders can change, which will affect your production capacity, internal competency and the culture of the company. A change in management can affect the mandate in managing the business.

But this is not always the case, and essentially we want to develop a different view of your current strategy, and use that view to enhance and enrich the strategy (which obviously has value, as it has kept you in business).

By building on the company’s current strengths and maximising opportunities, transformation can be an opportunity to enrich your current strategic thinking and help build your company into one that all your competitors fear.

If you are not clear what you are doing, so….difficult for the “transformation”

Before the detractors of business strategy jump in, let’s just make it clear that no matter how simple or complex your business is, no matter if you have a strategy document or not, your business does have a strategy. We often think that a formal strategy document equates to a strategy, which is not true. Strategy is living and evolving; it answers the question, ‘What can your business do that your competitors can’t and that your customer wants you to do?’ Strategy helps to give direction to your business, and strategic implementation helps all employees be clear on both the purpose of the company and the role they have to play in achieving it.

A moral imperative: The National Party came to power in 198 implemented the policy of apartheid. Economic repression led 4 to the expropriation of black property not already expropriated under the Land Act. There was widespread exclusion from the economy on the basis of race. In addition, white capitalists exploited black labour.

A social imperative: The top 10% of income earners in South Africa carry a significant load of the economy. They contribute about 46% towards the consumption of goods and services. In the US and Britain, the top 10% income earners contribute 31% and 270/0 respectively towards the consumption of goods and services. The difference between these developed countries and South Africa is that a significant middle class contributes about 70% towards the consumption of goods and services. The Gini coefficient measures the disparity between a few rich elites and the much poorer majority and reflects the level of social tension. If the Gini coefficient is too large,there is a tendency towards an unstable society, as reflected in highlevels of crime, etc. Black economic empowerment is expected to growthe black middle class in South Africa, thereby stabilising the country. Most South Africans agree with the first two imperatives and stopthere, but they miss a vital third issue, namely that BEE transformation is a financial and growth imperative. As a result of South Africa’s history, we have high unemployment – about 37⁰/0, compared to 6.4⁰/0 in Brazil and about 5⁰/0 each in the US and Britain. This unemployment rate can only be redressed in a growth environment. The country requires growth to create jobs and opportunities. In fact, BEE transformation requires growth to succeed.

The strategy document released by the Department of Trade and Industry reinforces this issue: ‘An effective and successful process of BEE and accelerated economic growth are mutually reinforcing objectives. The absence of shared economic growth will continue to generate a lower rate of growth as it will continue to restrict levels of demand in the economy‘.

BEE transformation is more sustainable in a growth environment, as it does not require you to move over and make space for someone else. Rather, growth requires extra capacity in your company, which you can ensure is representative. So, if BEE transformation benefits from growth, the obvious question is, ‘How can you grow your business?’

The approach was also known as “once empowered always empowered“. The challenge with this approach is that it is easily abused by selling an empowerment share and financing that stake. Dividends dry up, the BEE partner cannot make the repayments and the BEE shareholding reverts to the financiers. The business retains its BEE status and the BEE party is left with nothing.

The ease of abuse discouraged the Codes from recognising this principle and the phase one drafts of the Codes did not recognise it. Where the BEE party exited ownership, a new ownership calculation had to be done based on current credentials. Interestingly, it was Black businesspeople who approached the dti for a modified application of this principle.

To protect itself from losing its BEE partners, a business would insist on lock-in agreements signed by the Black party. The consequence of this, and from a BEE perspective an unintended consequence, is that the BEE party is locked into the investments. In some instances where the BEE party is only looking for a fast profit, the lock in is good because it protects people from themselves. BEE is trying to establish long-term participation in the economy. If it was a once-off event it would have been imposed as a wealth tax. On the other hand, there is a limit to how much you can protect people in business. Preventing entrepreneurs from realising profits and accessing funds restricts the growth of Black-owned capital and economic participation.

The end result is a middle ground that represents a conditional continued recognition of Black ownership. This allows Black entrepreneurs to exit the investment and the measured entity to continue recognising the Black ownership participation. The conditions are onerous because the Codes are still not in favour of the continued recognition. Very few businesses will retain the same amount of ownership points had the BEE party not exited.

Application of the once empowered always empowered principle

The practical application of the once empowered always empowered principle is technical so it has been simplified as much as possible. Keep in mind what is trying to be achieved. The Codes are comfortable with limited continued recognition where the exiting BEE party can demonstrate successful transformation in the company it has been associated with and that there has been value created for the BEE party.

If, after three years, the business has achieved a very good BEE score and the Black party has realised wealth during the association, then the Codes provide limited continued recognition where the BEE party sells a portion of its ownership.

There are two parts to the once empowered always empowered principle. The first is an outright sale of shares. The second is where the equity is used as security for obtaining finance where the BEE party subsequently defaults and loses the shareholding.

1. Sale of shares: Where a BEE party sells a share of its empowerment holding, the ownership points of the measured entity will survive the sale. The measured entity may continue to recognise the points based on a formula. The allowance is only available to the measured entity where:

• the BEE party held the shares in the company for a minimum period of three years
• transformation has taken place in the measured enterprise
• the points retained are subject to the level of transformation the measured entity has achieved。
• value has been created in the hands of the BEE party. (The value is determined in the formula using net value as a basis of calculation.)

2. Loss of equity through security: In an ownership deal, the measured entity is likely to include a clause preventing the BEE party from using the shares as security against any outside borrowing. Should the BEE party default on the borrowing, the financier will claim the BEE shares and the measured entity will lose its ownership credits. The once empowered always empowered principle provides a method for bringing liquidity in the form of borrowing against the shares to the BEE party without penalising the measured entity in the instance of default by the BEE party.

If the BEE party borrows against shares held in a measured entity and defaults on that borrowing, resulting in the BEE party losing the shareholding to the financier, the measured entity may continue to recognise the Black ownership, or a portion thereof according to a formula.

In the BEE environment, consideration must be given to the lack of funds held by Black people entering BEE deals. The necessity for finance provided an opportunity for ruthless businesspeople to undermine both the control and economic interest components held by Black people in BEE deals. To prevent this abuse, the Codes introduced a third component known as realisation points and, more specifically, the net value indicator. The net value indicator measures the Black person’s unencumbered (debt free) right of ownership. By allocating a high points rating to the net value indicator, businesses are encouraged to reduce systematically the level of debt over the BEE party’s shareholding.

Voting Rights

The objective of BEE is to help Black people gain equal ownership and control of the mainstream economy. Ownership without control represents passive participation. This indicates redistribution rather than active participation. Black people fought a hard struggle to gain the right to vote in the political environment. Voting rights attached to ownership represent the right to vote in the economic environment.

The importance of voting rights is evident in the Companies Act, which only looks at control to determine whether one business is a subsidiary of another business. The Companies Act has no reference to economic benefit when measuring subsidiaries. Control is measured through voting rights either at a shareholder or board participation level. BEE parties approaching ownership deals without sufficient regard for the necessity of preserving commensurate voting rights are not using the BEE policy for its intended purpose.

Where the BEE participation is financed by either the vendor (the seller) or a third party, voting rights may be held by the financier as security for the provision of the funds. The BEE party should negotiate the release of those voting rights on the basis that they will only revert to the financier on default of repayment, which the financier will insist on to protect its interests.

The ownership scorecard is designed to protect the BEE party’s voting rights by including an indicator set to measure voting rights in the entity in the hands of Black people.

Some businesses use a broad base of BEE shareholders in ownership deals with the specific intention of undermining the impact of Black- held voting rights. It is unlikely that a multitude of people with an insignificant shareholding are going to vote uniformly on an issue. Where Black people find themselves in this situation, they should consider pooling their votes under a voting agreement to regain the necessary participation in decision making.

The term “control“, used in the context of voting rights, is misleading and sends the wrong message to existing business owners. The targets set by the Codes are not indicative of control, but rather influence through participation. The targets are set in consideration of the Companies Act requiring a 75% majority vote to pass a special resolution. Setting a target of 25% + 1 vote gives the BEE party the ability to protect itself against unfair decisions made by the company, commonly known as minority protection rights, but it does not give control.

Measuring voting rights

Six points or a part thereof are available where Black people hold the right to participate in 25% + 1 of votes at shareholders meetings. Where the full target of 25% + 1 of total voting rights is not met, the points are awarded on a pro-rata basis.

The voting rights may be measured according to the flow-through or modified flow-through principles as discussed in the section on measurement principles.

Where the voting rights are pledged to a financier, so that the financier takes control of the voting rights if the BEE party defaults, the voting rights may be recognised as held by Black people on condition that the financier has no influence over the voting rights until reverting to the financier on default.

Calculating the points for voting rights

Voting right points are measured using the formula:

A = B/C x D

The score A is calculated as follows:

Step 1 B = Calculate the percentage of exercisable voting rights held by Black people of the total voting rights.

Step 2 Divide the result of Step 1 by C, the compliance target for the ownership criteria being measured (25% of total votes available + 1 vote).

Step 3 Multiply the result of Step 2 by D, the points weighting of that indicator, which is six.

Step 1 may apply the modified flow-through principle or the flow-through principle.

Where the enterprise achieves a score greater than the allocated six points, the scorecard will only recognise a maximum of six points.

The net value calculation is broken down into two formulae and draws from the deemed net value result above. The first, Formula A, calculates the debt-free ownership as calculated above, as a percentage of the targeted debt-free ownership for the year, measured as a pro-rata score against the allocated points.

Formula A

Note: This formula is a simplified version of what appears in the Codes. However, the result is the same.

A ^=9B/25%C

Step 1 Extract B, the deemed net value, from the result of the formula above.

Step 2 Calculate C. The graduation factor is the time-based target as set out below:

• 10% at the end of the first year after the net value date. The net value date is the later of the date of 9 February 2007 and the date on which the first unconditional BEE ownership deal that is still operational became effective. If a deal was done before 9 February 2007 then the net value date is 9 Feb 2007. If the deal was done after 9 February 2007, then the net value date is the date that the BEE deal became effective.
• 20% at the end of the second year
• 40% from the first day of the third year to the last day of the fourth year
• 60% from the first day of the fifth year to the last day of the sixth year
• 80% from the first day of the seventh year to the last day of the eighth year
• 100% from the first day of the ninth year to the last day of the tenth year.

Step 3 Multiply the result of Step 2 by the economic interest target of 25%. This provides the targeted debt-free ownership for the year.

Step 4 Divide Step 1, the deemed net value or actual debt-free ownership, by the result of Step 3, the targeted debt-free ownership. Step 5 Multiply the result of Step 4 by the allocated nine points.

The result is A, the pro-rata portion of the allocated points. This result must be compared to the result of Formula B and the lower of the two scores adopted.

The problem with Formula A is that it does not measure the BEE party’s overall shareholding. Therefore, full points could be scored if the BEE party only owned 5% of the business, which undermines the objective. Formula B is introduced to limit the net value points where the ownership target is not reached. Formula B limits measurement according to the strict flow-through principle, which has important consequences. Where the BEE party has financed the acquisition through the sale of equity to white parties in a BEE vehicle, the portion of the BEE vehicle owned by white parties is not recognised as Black owned. The modified flow-through principle is not applicable here – the strict flow-through principle must be used. It is important that Formula B is calculated using actual Black shareholding only.

Formula B is as follows: A = B/C * 9

A = the score to be compared against the result of Formula A

B = the percentage of economic interest Black participants hold in the entity. The Codes state “Black participants”, which means natural Black people. This restricts measurement to the flow- through principle and the modified flow-through principle is not allowed.

C = the target in respect of the ownership criteria (that is, 25%).

Step 6 Calculate B, the percentage shareholding in the hands of natural Black persons using the flow-through principle.
Step 7 Divide the result of Step 6 by C, the ownership target of 25%.
Step 8 Multiply the result of Step 7 by 9 points to establish the prorata share of points allocated to the indicator.

Step 9 Compare the results of Step 8 and Step 5 and take the lower of the two forward to the ownership scorecard.

Ownership fulfilment

Ownership fulfilment is a sweetener for the measured enterprise to encourage the unconditional handover of economic benefits to Black people. It is achieved when Black shareholders are released from all third-party legal or commercial obligations that withhold, defer or restrict enjoyment of rights associated with shareholding. Examples of these restrictions or obligations are pledges and cessions. The measured entity may claim one point once:

All obligations originating from financing received to obtain the equity ownership have been released in entirety, and

• the full nine points for net value have been obtained.

Bonus Points

The ownership bonus points are used to encourage the participation of Black women and broad-based groups in ownership. If Black women represent 10% of total ownership, then two points are awarded on the ownership scorecard.

If Black people participate in ownership through a broad-based ownership scheme, employee ownership scheme or a cooperative for a minimum of 10% of the total ownership of the business, then a single bonus point is available to the business.

Bonus points are calculated on economic interest held by Black women or priority groups as discussed above. These indicators may not be calculated using the modified flow-through principle. The Black participation may only be calculated using the flow-through principle.

I would like to use this opportunity to address the matter of Black women. Although the participation of Black women in QSEs is only encouraged through bonus points, businesses that expect to cross the QSE threshold need to consider that there is a specific indicator for Black women participation in the generic scorecard. Furthermore, the modified flow-through principle does not apply to the Black women indicator in the generic scorecard. Having 10% Black women ownership in an enterprise, calculated using the flow-through principle, will result in a significantly higher ownership score where the modified flow-through principle is used to facilitate finance for the BEE party.

The net value is determined by calculating the current market value of the asset in relation to the current market value of the acquisition debt. Where the value of the asset increases in relation to the debt, the net value points will increase. Where the debt is reduced in relation to the net value of the business, then the points will also increase to reflect the increase in the BEE party’s net asset value. On the other hand, where the value of the asset decreases in relation to the capital value of the debt, resulting from increased debt or decreased asset value, the associated points will decrease.

The challenge in the QSE environment is to obtain the current market value of a business every year, although this is an expensive exercise. The Codes do not require the business to obtain an annual external valuation. As long as the valuation is based on an acceptable measurement standard such as price earnings or discounted cash flow, and can be substantiated, the verification agency will accept the valuation. The best way to address the issue of obtaining a current market value is to use an acceptable valuation formula, which most accountants can provide, and to use that formula annually.

Measuring BEE net value

The Codes present fairly complicated formulas for measuring net value. I have broken down the components to make them easier to understand. When trying to understand this measurement follow this line of thought: the deemed net value calculates the BEE party’s debt-free ownership as a percentage of the current value of the business. This is divided by the targeted debt-free ownership as calculated in Formula A and multiplied by the allocated nine points to obtain a pro-rata score. Another formula, Formula B, is applied to limit the score where the targeted ownership of 25% is not achieved.

The objective is to measure and reward debt-free ownership held by the BEE party.

Deemed net value is:

• the current value of the BEE party’s shareholding in the business
• less any outstanding debt originating from purchasing that shareholding
• as a percentage of the current value of the business.

It is best described as the BEE party’s debt-free ownership as a percentage of the current value of the business or the liquidation value of the BEE party’s participation as a percentage of the current value of the business.

Note: The debt referred to throughout the calculation of net value is the debt originating from the purchase of the shares only. Debt originating from borrowing against the value of the shares after purchase is not included in the calculation of net value.

Market value of the equity instrument — Capital balance of the acquisition loan and/or other instrument
Market value of the measured enterprise

A= (B -C) / C

A = the net value to be included in Formula A.

Step 1 Calculate B, the value of the equity instrument held by Black people on the date of measurement.

Step 2 Calculate C, the carrying value of third-party rights against Black people’s economic interest as a result of financing the acquisition of the instrument.

Step 3 Subtract the result of Step 2 from that of Step 1 (the debt-free Black ownership).

Step 4 Calculate D, the current value of the measured enterprise on the date of measurement.

Step 5 Divide the result of Step 3 by the result of Step 4 to obtain the deemed net value (which is the debt-free ownership as a percentage of the value of the business).

to be continued

• 50% of the fiduciaries must be appointed by civil society.
• 50% of the fiduciaries of the scheme must be independent of the scheme, having no employment or beneficial interest in the scheme.
• 50% of the fiduciaries must be Black people and at least 25% Black women.
• The chairperson of the scheme must be independent of the scheme and be appointed by the beneficiaries of the scheme.
• The management fees of the scheme must not exceed 15% of total economic interest accruing to the trust. 85% of the benefits received by the fund must go to the beneficiaries.

The scheme’s constitution must state how it will deal with economic interest received, what portion will be reserved for future use and what portion will be distributed. On termination or winding up of the scheme, all economic interest must be transferred to the beneficiaries or an entity with similar objectives.

When simplifying the Codes some areas were not addressed. While not specified in the Codes, the following comments should be considered to create a stronger scheme that protects the interests of the beneficiaries.

From a practical perspective, entities should assume that the information above must be written into the constitution of the scheme before it may receive recognition as a general broad-based ownership scheme.

Interestingly, the Codes fail to give guidance on the number of beneficiaries the scheme should have to make it broad-based. While it is not written into the Codes, a broad-based scheme is generally considered to benefit 50 or more outside people who are not employees. For employee schemes the number of participating employees does not matter. There are certain tax advantages attached to BEE employee schemes but they are only granted under certain conditions.

The scheme should contain a detailed account of the beneficiaries using the flow-through principle to establish that the beneficiaries of the scheme are Black people as defined in the Codes.

Independent fiduciaries should be independent of the scheme, of the company who appoints the fiduciaries, of the company who manages the scheme and of the people who appoint them.

If a broad-based ownership scheme is not recognised as a general broad-based ownership scheme, as discussed above, the business may not include it in ownership as Black owned, unless it qualifies as an employee ownership scheme. If the broad-based ownership scheme does not qualify for recognition, then it will be included as non-Black owned when measuring ownership. The qualification is strict to limit fronting operations from diluting benefits to the intended beneficiaries. It is critical for measured entities to do necessary due diligence investigations to establish whether the intended BEE party is recognisable as Black owned when measuring ownership.